LONDON (Reuters) - The euro
hit its lowest level in nearly a year against the dollar
and euro zone government bond yields fell on Tuesday on
growing expectations the European Central Bank could
ease monetary policy as soon as next week.

The single currency fell as low as $1.3178 in Asian trade, its
weakest since Sept. 9, before recovering slightly, with ECB chief
Mario Draghi's comment last week that he was prepared to use all
available tools if euro zone inflation fell further still resonating
in markets.

Draghi also called for fiscal policy to play a greater role
alongside monetary policy to revive the economy.

The ECB holds its next policy meeting on Sept. 4. Euro zone data due
on Friday is forecast to show consumer prices rose just 0.3 percent
this month, down from a 0.4 percent increase in July, well below the
ECB's target of just less than 2 percent.

European shares were barely changed in early trade. The FTSEurofirst
300 index was flat at 1,366.57.

"Stocks are taking a breather following yesterday's acceleration.
The mood remains quite positive after Draghi's comments, which
confirmed that the ECB is determined to fight deflation," Saxo Bank
trader Pierre Martin said.

The prospect of looser ECB policy and possibly further stimulus
helped lift shares in Asia and on Wall Street, where the S&P 500
topped 2,000 for the first time.

MSCI's dollar-denominated index of Asia-Pacific shares outside Japan
gave up its gains late in the day to trade flat.

In New York, the S&P 500 hit a record closing high, up 0.48 percent
at 1,997.92, supported by gains in financial shares, which were seen
as the main beneficiary of any cheap money from the ECB just as the
U.S. Federal Reserve is preparing to end its bond-buying drive.

The dollar index, which measures the greenback against a currency
basket, hit a one-year high in New York before falling back to trade
0.1 percent lower.

The euro was last at $1.3209, up 0.1 percent on the day, and the yen
rose a similar amount at 103.90 to the dollar.

FIRMER YEN

The firmer yen took a toll on shares in Japanese exporters. The
Nikkei index closed down 0.6 percent.

German government bond yields, which hit a record low of 0.926
percent on Monday before pulling back, fell 1.4 basis points on
Tuesday to 0.94 percent. Two-year yields rose slightly but remained
negative at -0.04 percent.

"Euro/dollar is vulnerable to testing new lows. A downtrend is
easily formed given the opposite directions Fed and ECB monetary
policies are seemingly headed," said Kyosuke Suzuki, director of
forex at Societe Generale in Tokyo.

French President Francois Hollande's call on Monday for a cabinet
reshuffle after leftist rebel ministers argued for a U-turn on
economic policy, had also helped push yields and the euro lower. A
new government was expected to be unveiled on Tuesday.

Yields on peripheral euro zone debt, which the ECB could buy to pump
money into the bloc's lackluster economy as part of an
asset-purchase scheme known as quantitative easing, also fell.